Analysis of Cash and Accrual Accounting: Advantages, Disadvantages

This essay provides a comprehensive analysis of the cash and accrual basis of accounting. It begins by defining the cash basis, where revenues and expenses are recorded upon receipt or payment, highlighting its simplicity and tax advantages for small businesses. However, it also notes the disadvantages, such as the inability to track accounts receivable or payable accurately. The essay then transitions to the accrual basis, emphasizing its adherence to GAAP, its accurate reflection of financial position, and its preference among investors. While acknowledging the higher costs and reporting demands of accrual accounting, the essay concludes that the accrual method is more reliable and transparent, recommending its adoption for improved financial transaction recording. The essay also touches on which companies can use each method and why combining them is not permitted under GAAP. The document is available on Desklib, a platform offering study tools for students.

Running head: CASH AND ACCRUAL BASIS OF ACCOUNTING
Cash and Accrual Basis of Accounting
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CASH AND ACCRUAL BASIS OF ACCOUNTING
Cash and accrual basis of accounting
Advantages and disadvantages of cash basis of accounting.
The cash basis of accounting is a process in which sales are recorded at the time of
receipt of the sales amount and the expenses are recorded at the time of actual payment is
made. The cash basis of accenting is simple and reduces the time in recording the transactions
in the books of accounts. The major advantages and disadvantages of the cash basis is stated
below
Advantages of cash basis
 The cash basis is very helpful for tax purposes as it ensures that tax is not required to
be paid on the amount which is still not received by the organisation.
 It is useful for the small business enterprises in which cash flow can be restricted at
certain times.
 For enterprises that has to deal with large volume of cash transactions and does not
require to maintain huge volume of inventories for such enterprises cash accounting is
an easy and effective method.
 Under the cash basis method, it is comparatively easy to maintain and record the
accounting transactions even for a layman who dose not have sufficient knowledge
about accounting.
Disadvantages of cash accounting
 It is difficult to track the actual dates of sales and purchases as it used to record the
transaction on the date of receiving the payment or paying the expenses and not the
date on which such transactions actually happened.

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 Under the cash basis it is not possible to maintain any accounts receivable or accounts
payable accounts for which it is not possible to track which invoices are still pending
for payment or which invoices are required to be collected from the debtors.
 As the partial payments are not recorded in a cash basis method of accounting so the
amount of money which is due to be paid or collected cannot be reflected in the
balance sheet and for that reason the financial statement will not be give the true and
fair view of the financial position of an organisation.
 As under this method non cash items are not recorded in the books of accounts it may
be possible that the company fail to collect the payments that are due from the clients
and if the suppliers claim that certain amount is not paid by the company then in that
case the organisation will not be able to provide any supporting document that can
prove that the claim of the suppliers are not justified.
Accrual basis of accounting
Accrual accounting is a process of maintaining the books of accounts on the basis of
the concept that a transaction will be recorded in the books when such transaction actually
happened and not when the payment paid to suppliers or received from the customers. This is
the most scientific method of recording the financial transactions. The accrual method
ensures that all the transactions are recorded correctly on time and that the financial
statements give a true and fair view of the financial position of the company (Bonus 2019).
Advantages of the accrual method of accounting
Gives the actual position of the overall cash flow of the organisation

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The business transactions occurred on various time during a financial year. The
accrual accounting system ensures that income and expenses are recorded at the correct time
and thus gives a correct position of the cash flow of the business (Bisogno and Cuadrado-
Ballesteros 2019).
Preferred by investors
As the accrual basis of accounting gives the true and fair view of the financial
position of the company it is preferred mostly by the investors. Investors always give
emphasise to get the actual financial position of the organisation and that can be possible if
the organisation use accrual method of accounting and not the cash basis of accounting
(Costa and Cimò 2018).
It ensures the compliances that are required to be fulfilled under the GAAP
The provisions of the generally accepted accounting principles states that it is
essential for every organisation to maintain the accrual method of accounting as it is the
method that comply all the provisions which are essential for recording the transactions
accurately and efficiently (Brusca et al 2016).
Disadvantages of the accrual method
The disadvantages of the accrual basis of accounting are enumerated below
Expensive for small companies to maintain accrual basis of accounts
The accrual basis of accounting is complicated and difficult to maintain so to record
the transactions in an accrual basis of accounting it will be required to hire professional
accountants which may become costly for small organisations. Beside that huge number of
data is required in accrual basis of accounting which is also difficult to track and may require

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an extra staff for which additional cash outflow will be required (Kieso Weygandt and
Warfield 2019).
Excessive reporting is required
For maintaining the accuracy of the records under the accrual method of accounting it
is required to generate monthly or if possible weekly reports. This kind of reports require
high amount of time and efficient skills that can only be done by professionals. Thus, the
generation of reports require more time and attention which may be difficult for many
organisations to maintain on continuous basis.
Taxes
Under this method tax liability will increase as it considers both the revenues that are
received and which are yet to be collected. So under this method the organisations have to
pay more tax in comparison to the cash basis.
Companies that can use either cash or accrual basis of accounting
The small companies can use either of the cash basis or the accrual basis but at the
time of tax calculation the accrual basis is essential and, in that case, the small companies
should select the accrual basis as this method gives accurate figure of the revenue generated
during an accounting year (Goel 2016).
Companies that can use both the cash and accrual method
As per the generally accepted accounting principles no companies are allowed to use
both the methods of the accounting methods as most of the accounting principle require the
companies to follow the accrual method of accounting. The accounting principles clearly
states that expenses should be recorded only when such expenses occurred and not at the time

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of payment simultaneously the incomes are recorded at the time of raising the invoices and
not at the time of receiving the payments from the debtors. Thus, the accrual method is the
best method that ensures that both the debit and credit side of all the transactions matched
properly and there is no option of misinterpretation in the accounting system (Cohen and
Karatzimas 2017).
Difference between the cash and accrual method of accounting
The major difference between the cash and the accrual method of accounting lies in
the time of recording the accounting transactions in the books of accounts. Under the cash
method transactions are recorded at the time of receiving the payment from the customers and
the payments are recorded when the bill is actually paid. On the other hand, in case of accrual
method the transaction is recorded at the time of raising the invoice to the customers and the
payments are recorded when the bills are received from the suppliers (Sorrentino 2017).
The cash basis is very simple and easy to record in the books of accounts while the
accrual basis is more complicated and difficult to maintain.
Professional skill of accounting is not required for maintaining book of accounts
under the cash basis while on the other hand the accrual basis of accounting require special
professional skills to maintain the accounting transactions (Gamayuni 2019).
The accrual method is mostly used by the large companies as they have to maintain
the guidelines specified by the generally accepted accounting principles. Cash basis is
generally maintained by the small enterprises where there is no obligation to follow any rules
specified by the GAAP.
Reliable method of accounting

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As the accrual basis is more scientific and its is recommended by most of the
accounting regulatory bodies all over the world so it can be said that the accrual basis is much
reliable. The accrual basis of accounting records the transaction when they actually occurred
which ensures that there is no mismatch in the financial statements which is the main reason
of the popularity of this method and all the large organisations maintain this method rather
than the cash basis of accounting (Agriyanto et al 2016).
Currently tony is using the cash basis of accounting. This method should be
discontinued and he should start to implement the accrual basis of accounting as it will bring
more transparency in recording the financial transactions.

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References
Agriyanto, R., Rohman, A., Ratmono, D. and Ghozali, I., 2016. Accrual based accounting
implementation: an approach for modelling major decisions. Risk Governance &
Control, 6(12), pp.531-539.
Bisogno, M. and Cuadrado-Ballesteros, B., 2019. The Role of Public Sector Accounting on
Financial Sustainability and Governmental Effectiveness. In Financial Sustainability of
Public Sector Entities (pp. 123-144). Palgrave Macmillan, Cham.
Bonus, C.B.C., 2019. Financial Accounting and Reporting-I.
Brusca, I., Caperchione, E., Cohen, S. and Rossi, F.M. eds., 2016. Public sector accounting
and auditing in Europe: The challenge of harmonization. Springer.
Cohen, S. and Karatzimas, S., 2017. Accounting information quality and decision-usefulness
of governmental financial reporting: Moving from cash to modified cash. Meditari
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Costa, M. and Cimò, F., 2018. From Cash to Accrual Accounting: The seminal case of the
Sicilian Regional Public Bodies. d/Seas Working Papers-ISSN 2611-0172, 2(1).
Gamayuni, R.R., 2019. THE INITIAL IMPLEMENTATION OF ACCRUAL BASED
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